updated 07:30 pm EST, Wed January 14, 2004
Apple\'s FYQ1 2004
Apple's CFO Fred Anderson highlighted the company's financial performance during Apple's fiscal year Q1 2004 quarterly conference call. Anderson said that Apple had a strong quarter with revenue of just over $2 billion, its highest revenue in 4 years and "blow-out" sales of 733,000 iPods and strong peripheral and software sales (Panther upgrades). Apple also highlighted its record PowerBook sales and a strong performance in its retail segment during the December quarter.
Apple said that 48% of all unit sales were portables with a record 195,000 unit sales of PowerBooks and 201,000 iBook unit sales--up from the previous quarter by 11% for PowerBooks and 47% for iBooks, bolstered by the introduction of the new G4 iBook. Apple sold 206,000 Power Macs and 227,000 iMacs in the December quarter.
Apple said the channel inventory was down, but still remained 4-5 weeks. About two-thirds of its channel inventory was in its retail stores and one-third in its distribution channels.
The lower-than-expected desktop sales were due in part to the channel fill associated with the September quarter and the slight decrease in channel inventory in the December quarter. Anderson reiterated that he expects to be able to sustain 200,000 unit sales of Power Macs each quarter, noting that a majority of the G5 sales are product upgrades by current Pro customers rather than to new customers. Apple's "sell through" in the December quarter was up in "double digits" from the September quarter and there was higher product sales mix of dual processor machines, the company said in the Q&A following the call.
Anderson said Apple would continue with aggressive G5 pricing--even at the expense of gross margin--to drive unit sales. He noted a conscious company decision to offer more aggressive pricing than the G4 product line. Anderson said that HP's recent December-quarter pricing pressures didn't directly affect Apple.
iPod drives $270M in revenue
iPod sales are gaining momentum, according to Anderson. Apple generated $270M in iPod revenue--with more than $15 million coming from iPod accessories and AppleCare extended warranties. Anderson highlighted the 30 million songs total sales from the iTunes Music store with 17 million song downloads in the December quarter alone. However, Apple acknowleged that it even with its planned production increases, it could not meet the demand for iPod around the world.
Apple attributed part of the gain in momentum to the introduction of iTunes for Windows. NPDTechworld said that the iPod remained the number one MP3 player in the industry and Apple said that the iTunes Music Store represented 70% of all legal song downloads. Going forward, Apple says that the Pepsi-Apple marketing agreement and the HP-Apple iPod deal will help sustain the momentum. About 2/3 of all iPod sales were in the US and Apple "was pleased" with sales of the iPod at Best Buy stores.
Apple saw a year-over-year increase of 54% with $238 million in software (and other) sales, driven by $60 million in Panther upgrades. Anderson said the sales were strongest of any new OS introduction in recent memory and that he expects strong sales going forward; roughly half of the 20 million (upgrade qualified) user-base have Mac OS X installed; however, Apple did not provide details on Panther penetration among the Mac OS X users.
Apple's direct sales (to education and Internet) accounted for 43% of its total revenue, which was up from 36% in the year-ago quarter. Saying that Internet sales were up "appreciably", Apple declined to provide any specific numbers related to its Web presence. Non-CPU sales accounted for 37% of total revenue in the December quarter--up from 25% in the year ago quarter and driven primarily by the $256 in revenue sales (13% overall) generated by the iPod.
Apple retail: "better than expected" (again)
Apple's retail segment performed particularly well. Apple opened eight stores and one international store during the quarter, bringing the total to 73 open stores at the end of the quarter. The total revenue generated by the retail segment was $273 up 84% from the year-ago quarter. Apple had an average of 69 stores open during the quarter with an average profit of $4 million per store--up from the $3.1 million profit/store average in the year-ago quarter. The retail segment had an operating profit of $9 million--not including the $52 million in operating profit associated with manufacturing.
Apple said that it had 5.9 million visitors to its stores during the December quarter, up significantly from the 4.3 million visitors a year ago. Anderson said that its stores averaged 6,000 visitors per week per store. The high-profile Apple Store Tokyo opened on November 30 and achieved the highest opening sales of any other store with $1 million per week in revenue during December. Apple expects to open other high-profile stores in San Francisco (Spring) and Osaka, Japan (Fall). Apple expects continued growth with switcher sales, increased sales to small businesses, and more services through the genius bar.
Apple was pleased with its sales to small business, education, and consumers at its retail locations.
Sales in Americas, Europe drive growth
Apple said it saw an 8% unit and 20% sales increase in education sales as well as year-over-year sales increase in each of other geographical operating segments: Americas (25%), Europe (48%), and Japan (13%). Anderson said that including the retail division sales in the Americas were up 34%. Sales to high education customers were strong year-over-year, but sales to K-12 customers were down slightly.
Apple noted that the first quarter is usually strong strong Europe, but the 54% in revenue growth--well ahead of the 19% unit shipment growth in the same region--was in part due to non-CPU sales and strong sales of Pro products.
Warranty issues, G5 transition lead to lower gross margins
Overall gross margins were lower than expected at 26.7% due to higher warranty expenses and product transition to the G5. The warranty replacements incurred were related to product replacement for the "white spot" issue seen on PowerBook (and some iBook) LCDs. Anderson the company reacted quickly to resolve the issue and is offering product replacements to all affected customers through AppleCare. Apple also said the the product transition costs--leading to lower gross margins--associated with the G5 Power Mac were due to price protection amd lower margins with the mid-quarter transition from a single-processor to dual-processor 1.8GHz Power Mac (at the same price point.)
Apple said the iPod gross margins were close the company's overall gross margins due to low component costs and strong direct sales. Going forward, he doesn't expect the HP-iPod and iPod mini margins of 20% to significantly alter the gross margin goal of 27-28%.
Apple said that operating costs of $462 million were higher than expected by about $7 million due to increased advertising costs and costs associated with higher revenue. Apple's saw a quarterly operating profit of 3.7%, its highest percentage ever. Apple saw $13 million other revenue, including a pre-tax gain of $4 million from the sales of Akamai shares, but Apple expects this to remain below the previous quarters due to lower interests rates. Apple said its cash reserves increased to just over $4.8 billion due to a strong earnings quarter and improved capital management. Apple's capital expenditures were $44 million with $28 million spent on its expansion of its retail segment.
December inventory was at 4-5 weeks; this was down by about 6% from the September quarter, according to Anderson, who also noted that March quarter sales were expected to be slower as expected by industry trends. Apple DSO (days sales outstanding) was lower to 27, driving by the linear sales curve during the quarter and higher percentage of direct sales.
Third consecutive quarter of double digit profit expected
Going forward, Apple said it expects its third consecutive quater of double digit grown with $1.8 billion in revenue and earnings of between $0.08 and $0.10 next quarter. Apple will become a "debt-free" company in February after it pays off $300M in debt. Apple expects gross margins to increase sequentially to 27.5 points with lower warranty costs and a better mix of pro products--offset by lower software (Panther) sales. Gross margins will also be affected positively by downward memory pricing (LCD pricing was expected to be flat).